Home equity loans are second mortgages that let you borrow against the equity you’ve built up in your property. You’ll receive the funds in a lump sum, then repay the loan in monthly installments over an agreed-upon timeframe — generally five to 30 years.
Remember when you had to pay closing costs on your first mortgage? Home equity loans include closing costs too.
Dig deeper: What is a home equity loan? A complete overview
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Like primary mortgages, home equity loans come with closing costs, which are fees you pay up front at closing. Closing costs for home equity loans typically range from 2% to 5% of the loan amount. For example, if you take out a $120,000 home equity loan, your closing costs will probably fall between $2,400 and $6,000.
Learn more: Closing costs — A guide to how they work
Every mortgage lender is different, but here are some common home equity loan closing costs you can expect to pay:
Origination fee: A mortgage origination fee is what lenders charge you to process your loan application. It's generally between 0.5% and 1% of the loan amount.
Appraisal fee: Most lenders require a home appraisal to determine the market value of your home before approving your home equity loan application. According to the home services website Angi, appraisal fees typically cost between $300 to $450, depending on factors like the property size and your location.
Credit report fee: Lenders will also charge a fee to pull your credit report, usually costing you less than $30.
Title fees: Title fees cover the cost of title insurance and a title search to ensure your home is free of any legal issues. You can expect to shell out several hundred to a few thousand dollars for these services.
Notary fee: Your mortgage lender might require a notary to witness your document signatures, but this fee is very small.
Document preparation fee: This covers the cost of preparing loan documents for your application. The price varies by lender but should be no more than $100.
Read more: What is a mortgage origination fee?
Home equity loan closing costs aren’t cheap, but there are ways to lower the total amount. Here are some options.
The higher your FICO score, the more likely you'll get approved for a home equity loan with favorable terms. A higher credit score indicates you’re a more trustworthy borrower who makes timely payments. Plus, some lenders may be willing to lower or waive certain charges if they see you as a lower-risk borrower.
Don’t just go with the first offer that comes along. Take the time to shop around and compare closing costs across at least three home equity loan lenders. Make sure to consider other factors too, such as interest rates and term lengths, so you know you’re getting the best overall deal.
No-closing-cost home equity loans are exactly what they sound like — they don’t require you to pay closing costs up front. However, not all lenders offer this option, so you may need to shop around to find one that fits your needs.
It’s also worth noting that while these loans don’t come with closing costs, lenders often recoup those expenses by charging a higher interest rate or rolling the closing costs into your loan principal. Crunch the numbers to see if you would truly save money with this option versus taking out a traditional home equity loan.
chof360 note: Interested in a no-closing-cost home equity loan? Check out our Navy Federal Credit Union mortgage review and Regions mortgage review — both of these lenders are worthwhile options.
As you shop for lenders, it doesn’t hurt to ask companies whether they’re willing to reduce or waive charges. Though certain closing costs, like appraisal fees, are typically nonnegotiable, some lenders may have wiggle room for other expenses, such as application fees.
Closing costs are usually a percentage of your loan amount (around 2% to 5%). By borrowing less, you’ll pay less in home equity loan closing costs.
Dive deeper: 7 strategies for reducing closing costs
Home equity loans can be worth the closing costs — it depends on how you plan to use the funds. If you take out a home equity loan to pay for something that will add value to your property, such as a bathroom renovation, the long-term financial benefits may outweigh the up-front costs.
However, it might not be worth the costs if you’re using the money to fund a one-time expense, like a wedding or summer vacation, especially since you’re putting your home at risk as collateral. There's no limit on how you spend the money, though. It’s totally up to you.
If you’re unsure whether taking out a home equity loan is the right move, talk to a loan officer, lender, or financial advisor to help you decide.
Read more: What do you need to qualify for a home equity loan?
Yes, some lenders let you roll closing costs into your home equity loan, resulting in a higher loan principal. But remember that this method will save you money initially, but paying interest on a higher principal means you’ll spend more on interest charges in the long run.
One of the most significant downsides of taking out a home equity loan is the risk of losing your home. Since home equity loans use your house as collateral, the lender can foreclose on your home to recoup its investment if you default.
Depending on your lender, the closing process for a home equity loan can take between one week and two months. Closing could take even longer if there are hiccups, like incomplete documents or appraisal delays.
This article was edited by Laura Grace Tarpley.
